"Base-of-the-Pyramid scholars and practitioners (myself
included) became so preoccupied with the social mission
that we lost sight of business fundamentals and the realities
of working within corporations."

Erik Simanis is managing director of Market
Creation Strategies at the Center for Sustainable
Global Enterprise at Johnson. His
applied research focuses on advancing innovation
and business development strategies
for commercializing new product categories,
particularly in emerging markets. Erik has
led and consulted to new business ventures
in India, Bangladesh, Africa, Mexico, Eastern
Europe, and the U.S., and has held management
positions in the wood products and
transportation industries. His recent work is
published in the Harvard Business Review, The
Wall Street Journal, Sloan Management Review,
and the journal Innovations. Erik holds a PhD in Management from Cornell, an
MBA from the University of North Carolina at Chapel Hill, where he received the
Norman Block Award for highest academic achievement, and a BA magna cum
laude from Wake Forest University.

Related links:

Vantage Point

Getting Base-of-the-Pyramid
projects back to
business fundamentals

By Erik Simanis

In the early years of this century, leading business scholars offered
global corporations a tantalizing vision of the enormous profits they
could generate by doing business with the "base of the pyramid" (BoP),
the four billion people in developing economies who live on less than
$2.50 per day. By producing products for the poor, companies could
reduce poverty, forge an inclusive global economy, and get in on "the
biggest potential market opportunity in the history of commerce," as
one influential paper put it i.

The argument was elegant in its simplicity. Viewed through a business
lens, the enormous unmet human needs at the BoP represented huge,
untapped markets. The estimated value of new products to improve
nutrition and sanitation, reduce chronic diseases, and purify water
was in the trillions of dollars. It was a classic argument of enlightened
self-interest, and one that I, too, embraced.

The business model prescribed for the BoP was straightforward:
forgo "the traditional pursuit of high margins," aiming instead for high
sales volume at low prices.ii Making good on the poverty-alleviation
objective, however, became the focus of extensive debate. Simply selling
products to the poor was criticized as exploitative, even imperialistic;
corporations were challenged to work in close partnership with poor
communities, much like nonprofits. Business thinkers, development
activists, and social-investment advocates developed frameworks for
"inclusive business practices" built around "mutual value," "co-creation,"
"empowerment," "impact-assessment," and "public-private partnerships."
Pioneering corporations applied these new tools to ambitious projects
to solve social ills — and it was assumed that profits would follow.

A bit more than a decade later, most of the BoP pilot projects in the
developing world shared a similar fate. Nike’s World Shoe in China;
Hewlett-Packard’s World e-Inclusion in India; Procter & Gamble’s
PUR water-purification powder in Guatemala, Morocco, Pakistan,
and the Philippines; DuPont subsidiary Solae’s soy-protein isolate in
India; and SC Johnson’s Community Cleaning Services in Kenya, for
example, offered compelling stories of positive community impact. But
the profits? Those were replaced with fuzzy claims of long-term value,
mostly in the form of positive public relations and brand recognition.
[Disclosure: I was actively involved in supporting the DuPont and SC
Johnson ventures.] The projects looked more like philanthropic endeavors
than rigorous business ventures. In the absence of return on investment,
companies (understandably) shuttered BoP projects, or shifted them from
core business units to public affairs and corporate social responsibility
(CSR) arms, relegating these ventures to limited scale and, essentially,
business irrelevance.

In 2012, Johnson’s Center for Sustainable Global Enterprise and consumer products company SC Johnson — whose brands include Raid insecticides, OFF mosquito
repellent, Glade air fresheners, and Mr. Muscle surface cleaners — launched a pilot business in Ghana for bringing the company's products to small-holder farming
communities in Africa. The initiative is part of a three-year project funded by SC Johnson and the Bill & Melinda Gates Foundation, which aims to reduce the transmission
of malaria, a mosquito-born disease. The resulting business, which was launched under the brand "WOW," is a membership-based club that helps families "care for their
homes better and faster" and "to be part of something bigger." Here, members of WOW’s sales team in Bobikuma, Ghana, perform a skit during the business launch to
help communicate the value of being a member of the WOW club.

What went wrong? I believe BoP scholars and managers (myself
included) became so preoccupied with the social mission that we lost sight
of business fundamentals and the realities of working within corporations.
In our focus on poverty alleviation and alternative bottom lines, we gave short shrift to the vexing business challenges of these markets:
higher operating costs, nonexistent distribution channels, consumers
who require extensive product education, slow demand growth, costly
capital, and, of course, extremely cash-strapped purchasers.iii It all adds
up to a complex business problem, one that will only be solved through
a tight focus on business economics — not on poverty alleviation.

Without a singular focus on profitability, not only will BoP projects fail
economically, but they will be starved of capital and remain insignificant
in scale. Ultimately, the path to sustained corporate investment in
BoP lies in generating returns competitive with alternative uses of
capital. The incentive structures and, consequently, the organizational
routines of today’s multinational corporations are centered on return
on investment, not broad triple bottom lines of social, environmental,
and economic value. Continuing to ignore this reality ultimately fails
the middle managers who have to put BoP strategies into action, since
their annual performance and long-term career success are determined
by delivered profit. Development impacts have to become a byproduct
of profitable business — not vice versa.iv

The good news is that there is reason for optimism. The microfinance
industry, for example, which uses innovative approaches to lend to very
poor consumers who lack collateral, has attracted billions of dollars in
capital, and microfinance companies in Mexico and India have floated
successful IPOs.v The industry may well have empowered women and
alleviated poverty, but it attracts capital primarily because its returns are
competitive. It’s worth noting that these competitive returns are made
possible by gross margins that reach 60 to 70 percent — extraordinarily
high for the banking sector, but necessary for offsetting high operating
costs in rural villages.vi

At Johnson, we are seeing a new wave of corporate interest in a
"business fundamentals" approach to the BoP. The Center for Sustainable
Global Enterprise and I recently completed a three-and-a-half-year
partnership with SC Johnson in Ghana to test a new channel targeting
the rural poor for mosquito-control products that could help prevent
malaria. We’ve also begun work with consumer products giant Unilever
— manufacturer of global brands that include Vaseline, Pepsodent
toothpaste, and Lifebuoy soap — to profitably reach low-income
consumers in Africa and South Asia.

In Latin America, we are coaching managers of Arcor — one of
the largest food companies in the region — under a recently launched
market-creation program aimed at the BoP. The global cement company
Lafarge has signed on to be part of the first cohort of managers in our
Market Creation Accelerator — a field-based program that facilitates
"deep dives" into BoP business models.

In all these projects, our focus is on developing and testing theoretically
rigorous, yet practical, tools and techniques for addressing the business
challenge of BoP markets. Take, for example, the partnership with SC
Johnson in Ghana. As anticipated, initial research revealed that consumers
not only knew little about how malaria was transmitted, but were actually
indifferent to it — it was a routine part of their lives. In addition, there
were no sales outlets through which the products could effectively be
sold, and the rutted dirt roads connecting the villages would limit the
reach of any distribution hub.

To thoroughly understand the economics of a new rural sales channel
that could provide the "high-touch," face-to-face interaction needed
to raise consumers’ interest and be profitable within our investment
timeline, we developed a detailed financial model. The model showed
profitability only at a very high gross margin and a relatively high price
point — an approach counter to conventional wisdom.

Higher margins were attained through a combination of strategies
to raise revenue and drive down costs. To raise the price point for each
transaction, mosquito products were bundled with other SCJ home care
products, including a solid-surface cleaner and an air freshener.
Packaging costs were eliminated by giving customers branded, refillable containers; and sales costs were cut by structuring the business as a club,
with memberships sold to groups of customers rather than individuals.vii

We also used a suite of market-creation strategies to help drive up
consumer adoption. A monthly membership pricing structure ensured
that customers would use products multiple times, building comfort
and familiarity with the use of mosquito repellents and sprays. We also
added a loyalty rewards program, with prizes consumers already valued,
such as farming implements and metal washbasins. This helped offset
the novelty of the SCJ products and increased their perceived value.
The results of the pilot were very promising, and we made significant
strides toward profitability. The rigorous financial modeling provided
us crucial information on areas for improvement. A second pilot, based
on a revised business model, is now underway.

In the end, a focus on business fundamentals is the best way to
ensure positive, sustainable social impact from corporate BoP projects.
Aside from ensuring access to high-quality products that improve
people’s lives, a profitable business will contribute to local economic
development. It’s not the immediate, revolutionary change about which
pundits wax eloquently — but it’s real and it’s doable. And over time,
the incremental impact of thousands of profitable corporate ventures
will bring about radical change in the lives of the poor.

i C. K. Prahalad and Stuart Hart, "The Fortune at the Bottom of the Pyramid,"
Strategy+Business, Issue 26, First Quarter 2002.

ii Ibid.

iii Erik Simanis, "At the Base of the Pyramid," Wall Street Journal, October 26,
2009; Erik Simanis, "Needs, Needs Everywhere, but Not a BoP Market to Tap"
in Ted London and Stuart L. Hart, eds., Next Generation Business Strategies for the
Base of the Pyramid: New Approaches for Building Mutual Value (Upper Saddle River,
New Jersey: FT Press, 2011); Erik Simanis, "Bringing the Bottom of the Pyramid
Into Business Focus," in Rémi Genevey et al., eds., A Planet for Life 2013—Reducing
Inequalities: A Sustainable Development Challenge (Delhi: TERI, 2013).

iv Erik Simanis and Mark Milstein, "Back to Business Fundamentals: Making ‘Bottom
of the Pyramid’ Relevant to Core Business," Field Action Science Reports, Issue
4, 2012.